Burning concern

Friday, July 27, 2012

Shipowners expect higher fuel costs under U.S. low-sulfur rules.

By Chris Dupin

As the United States prepares to begin enforcing its new low-sulfur fuel requirements for ships operating in coastal waters this month, experts are worried about the availability and cost of fuel both now and as the environmental regulations ratchet up in the years ahead.
“There is concern that the current refiners may not be able to produce sufficient stock to supply all the ships in certain locations, mainly where there are refineries that are geared to produce an abundance of light products — jet fuel, kerosene, gasoline,” said Raymond Brigley, president of Oiltest, a Clark, N.J.-based firm that tests fuel for both sellers and shipowners.
“Refineries don’t exist to make residual fuel — it is just a byproduct,” added Rob Leventhal, Oiltest’s vice president of sales and marketing.
When older refineries crack a barrel of oil, as much as 15 percent of the product they make is the heavy, viscous bunker fuel that most ships use. Newer refineries using processes such as fluid catalytic cracking can squeeze a much higher percentage of distillate product out of each barrel of oil, leaving only 4 percent as residual fuel. And many of the older refineries are closing.
On Aug. 1, the Coast Guard will begin enforcing the North American Emission Control Area (ECA), an area along the U.S. and Canadian coasts where carriers will be required to burn a fuel with 1 percent or less sulfur. (The ECA has been in place for more than a year, but not enforced.)
The cost impact will likely be immediate.
Oiltest executives said there is already a premium for low-sulfur fuel. A year ago, Leventhal said suppliers were estimating the difference in cost between low- and high-sulfur residual fuels would be $45 a ton (in mid-June ordinary IFO380 bunker fuel was selling at $575 a ton in Houston). But at a June industry conference, “the number they were throwing out was $150 a ton,” Leventhal said.
“Implementation of the ECA will result in higher fuel costs for diesel-powered cargo vessels serving Alaska,” said Jim Storey, a spokesman for Horizon Line. “Our Hawaii and Puerto Rico vessels will not be impacted because we operate steamships in those trade lanes. The specific cost increase and its impact on our Alaska customers will be determined closer to implementation. We do not anticipate any supply constraints for the fuel, thanks to our strong relationship with our suppliers.”
In July, the state of Alaska sued the federal government seeking to block enforcement of the ECA in its waters.
“Extension of the ECA to Alaska was unlawful because two-thirds of the U.S. Senate did not consent to that extension as required by the U.S. Constitution,” the state argued.
“Companies that ship goods to Alaska estimate that ECA’s low-sulfur requirements will increase shipping costs to Alaska by 8 percent,” the complaint said, and “those increased costs will be passed on to consumers, effectively resulting in a tax increase on all Alaskans.”
Higher fuel costs could also reduce visits at Alaskan ports by 585,000 passengers, the state said, adding that 14 percent of all employment in the state is cruise-related.
In testimony to the House of Representatives Transportation and Infrastructure Committee’s Coast Guard and maritime transportation subcommittee in April, Paul Cozza, president of Massachusetts-based CSL International, a short-sea shipping company that operates dry-bulk ships, said his firm was concerned “the 200-mile ECA is too stringent for some vessels and may not provide any appreciable environmental benefit beyond 50 miles for lower horsepower ships, such as CSL’s and those of other short-sea shipping companies.”
He said the “2012 fuel price impacts, for CSL, as an example, while sustainable, will still be measured in millions of dollars.”
By Aug. 1, 2015, he noted that “vessels operating within the ECA will be required to use an ultra-low 0.1 percent sulfur fuel which is a maritime diesel. Significantly, prices for this ultra-low sulfur fuel — to the extent that the fuel is available — will raise our cargo rates and challenge our business and more importantly the customers we serve.”
He estimated fuel prices may double by 2015 and said “although well-intended, flaws in current ECA regulations will jeopardize the short-sea shipping sector.”
Oiltest’s Leventhal said shipowners face a number of operational issues as they make the switch.
They will have to have separate tanks for low-sulfur bunker fuel or distillate fuel when operating in the ECA. Bunker fuel burned by most ships must be heated so it will flow and pass through settling tanks and filters before being injected into the engine.
Companies must calculate how many miles out from the ECA zone for when they need to switch over to cleaner fuel.
Chris Koch, president of the World Shipping Council, the principal trade organization for the liner industry, estimates that compliance costs associated with the ECA would exceed $3 billion by 2020, with $2 billion coming from the cost of using lower-sulfur distillate fuel. The other $1 billion would come from hardware changes on new ships and the cost of urea in after-treatment systems using Selective Catalytic Reduction Systems (SCR) to control nitrogen oxides.
Demand for low-sulfur fuel will intensify in 2020 because under IMO regulations the maximum sulfur content of marine fuel will be lowered worldwide — that is outside of ECA areas — from 3.5 percent to 0.5 percent.
WSC said 1 percent fuel should be available in most major U.S. ports, as well as in Singapore, Hong Kong and all major European ports north of the English Channel, but said Canadian availability is less certain.
“If a vessel is unable to obtain compliant fuel, the government will expect the vessel to have adequate documentation of the fuel’s unavailability. We expect that the government will work cooperatively with the industry as the ECA implementation takes effect in order to address issues that may arise,” the industry group said.
Leventhal said if shipowners can produce documentation showing they have purchased low-sulfur fuel and made the switch well in time to clean up their exhaust before they enter the ECA, they should be in good shape when the Coast Guard inspects their ships.
If they don’t have low-sulfur fuel, they are going to have to demonstrate very clearly that it was not available at their last port of call. He said regulators have made it clear that just because low-sulfur fuel is more expensive is no excuse for not buying and burning it.